Wealth International, Limited (trustprofessionals.com) : Where There's W.I.L., There's A Way

W.I.L. Offshore News Digest for Week of December 1, 2008

This Week’s Entries : This week’s W.I.L. Finance Digest is here.


A few useful words of advice from the Director and co-founder of Expat Women, which apply people of either sex. The Expat Women site looks like an interesting resource itself. We have posted one of the articles from the site's "Business Ideas" section immediately below.

You do not have to be a one of the Beatles to believe that you get by with a little help from your friends. I help you, you help me -- that is how society works.

Whether you are migrating to Madrid, expatriating to Jakarta or leaving for a short-term assignment to Buenos Aires, the process of settling in and getting connected is one of the most important first steps that you will make. Do it well and your whole experience could be positive. Leave it off the priority list and you might find that your work life and personal life both start to suffer.

Expats need networks -- and they need them fast. They need someone to call to impress their new boss with VIP event invitations. They need someone to count on at 2am when they are rushed to the local emergency room and need a friend to both translate for them and lend critical moral support.

If you are an expat and you do not already have a strong support network abroad, here are seven top expat networking tips to help get you started:

See The Value
If you understand that your ability to network could either make or break your assignment success, you will network, because you personally see it as important. This applies equally to both working and non-working expats. Expat executives need to network primarily to facilitate business and to gain local credibility. Non-working expats, such as trailing spouses and free-spirited solo expats, need to network because they do not enjoy the luxury of walking into an employer's ready-made office support network. They need to create their own networks from scratch.

Do Your Research
Get online to research as many local clubs, associations, sports activities, interest groups and support systems as you can. Then when you arrive, physically visit these groups and ask about where to find more groups.

Be Proactive
Take responsibility for your own success. Before you arrive, make calls to others in your company who are already based in your destination. Introduce yourself. Ask for advice -- most expats have plenty. Upon arrival, visit the groups that you are interested in and remember to write down all of the names and contact numbers of the people that you meet and would like to keep in touch with.

Don’t Judge A Book By Its Cover
Every expat that you meet can offer you more than their current position title suggests. Dig deep. Find out what other international assignments they have been on and ask them about their experiences. There is bound to be at least one thing that you can learn from every person that you meet. This applies also when you meet non-working expats, who you should only dismiss at your own detriment. Not only do these expats typically have a great skill set and a valuable list of connections back home, but the long-termers have usually built up fabulous local networks that would turn expat executives green with envy. Never underestimate what a non-working expat might bring to the table.

Find Mentors
In addition to friends, seek mentors. These are people that can offer priceless experience, wisdom and guidance. For the expat executive, mentors might be the heads of local business associations, colleagues, local or locally-based business owners, expat executive coaches and so on. For the non-worker, mentors might consist of the presidents of local expat clubs, Community Liaison Officers (CLOs) in your organization, independent entrepreneurs -- who might provide the necessary inspiration for you to start a business abroad, and expat life coaches -- who are typically longer-term, very well-connected expats who have also become experts on the local culture, expectations and challenges.

Mould Your Own Identity
Everybody needs to be "somebody." If you arrive in a country and you do not have a job to go to and a box of business cards waiting for you, then go straight to the print shop and design some. At first, you just need cards showing your name and basic contact details. Then down the track, go back and order cards that also describe what you do or would like to do, to help spark meaningful conversation with the people that you meet and to give them some reason to remember you. If you were, or would like to be, an editor, then your card confidently displays "Editorial Advisor". If you would like to get into photography, pronounce yourself a "Photographic Consultant". If you are proud to be a stay-at-home mother, write "Maternal Empress", "Chief Arbitrator", "24/7 Educator" -- or anything else that gives you your own sense of identity, boosts your self-esteem plus conveys a message to new acquaintances.

Give, Give, Give
The number one rule in networking is to give without expecting anything in return. Whenever someone asks you for something, give with a smile on your face and go out of your way to help them. This will not only make both of you feel good, but it will build up your piggy bank of potential reciprocal favors. Even better, become a "go-to" person in your local community and people will start introducing themselves to you. At that point, your network will grow by itself and when you need to call someone for help at 2 a.m., rather than be scrambling for names, your Blackberry will be literally full of numbers to call.

And that, I can assure you, is a wonderful feeling.


The Expat Women website we discovered in a link from an Escape from America Magazine article (posted above) looks like an interesting and informative resource, featuring many firsthand stories and interviews with people who have successfully made a transition to being expatriates. We look forward to exploring the site further.

In this interview, Rev. Macarena Rose explains how she moved to Belize as director of her church and fell in love with the country. With her teenage daughter's active consent and encouragement they decided to make the move permanent. She soon perceived the business opportunity of providing trustworthy real estate brokerage services for Belize and founded Rainforest Realty. She also went on to host an inspirational local television show and coach a semipro soccer team. Obviously an interesting woman!

Rev. Macarena Rose moved from the U.S. to Belize, as the director of her church. Two years later, she runs Rainforest Realty, hosts a weekly TV show, has coached the Semipro Men's soccer team and is the voice on the cell phone system in Belize.

ExpatWomen: Macarena, let's start from the beginning. What inspired you to move with your 16-year-old daughter Chiara and your 10 animals from Florida, United States, to Belize, 5 years ago?

Macarena: I believe in following your inspiration and dreams. Mine was strong to move to Belize, as was my daughter's. I do not believe in wondering what if, or later saying, "Wow, I wish I had ..." So off we went!

What did Chiara think of your decision and how has she adapted in Belize?

I was going to wait and not move to Belize until she graduated from high school, but she shared my dream -- she too wanted to go, so it was her desire to be part of the journey of moving to Belize. I have no regrets and can see the difference in her from having had an international living experience in her life. She is now very open to all people, and has more of a worldly understanding and sense of compassion for people's lives and their struggles.

Initially, I was not sure how she would adjust, so she and I signed an 18 month contract with each other: We would move to Belize and stay there, no matter what for the term. Well, we moved to Belize and she had not been there even 10 days, when she looked over the veranda's views of the stunning Mayan Mountains and said, "I never want to leave, Mom." This -- from a teenager who used to have the cable TV on, a cell phone tied to her ear, the house phone attached to the other ear and instant messaging on the computer all at the same time!! Now she was living in Belize with not even a McDonald's in the country! One of my earliest memories of her speedy adaptation took place on Chiara's first day of school. I went to take her lunch and there she was -- leaning out of the barn door-like windows, looking like a scene out of Mr. Ed, and a gorgeous happy smile from ear to ear. She had just mastered her first words of Creole with her newly-made friends.

How did you end up working as a real estate agent and being elected as the President of the Belize National Association of Realtors®?

When I first moved to Belize, I looked for land for Chiara and myself on which to build our home. In doing so, I was shown around San Ignacio by three different men, (who still work here), and they each offered me the same piece of real estate -- for three different prices! I was, let us say, highly insulted. When I complained to my friend, who happened to be a political leader of Belize, he said, well this is what they do here, and if you do not like it, I will give you my properties to sell and you can show them how to do it differently. So, with that, I went to work learning everything I could about titles, land laws and ownership rights in Belize. In 2005, I became a Founding Member of the Belize National Association of Realtors. In November of 2007, I signed the Bi-Lateral Agreement with the U.S.-based National Association of Realtors (N.A.R.), for our Association.

You also offer your services as a Relocation Specialist. Do you think the real estate and the destination services industries are good options for expats looking to start new businesses abroad?

It is my humble opinion that who better to help you than someone who has done it, who can advise on what to look out for, and who knows it from your perspective.

You also host a weekly TV show in Belize, you have coached the Semi Pro Men's soccer team and you are the voice on the cell phone system in Belize. Tell us more.

Well, I moved to Belize to be part of Belize, and feel very fortunate to be able to contribute time and energy in many different activities. The television show I host, is all about bringing to light the extraordinary men and women who make Belize a better country, and this a better world. When the producer of the station asked me to do this show, I immediately agreed to do so, and for free. What better way to spread the positive aspects of people's lives than by making sure their light shines to all! I love that the youth see these adults they may know little about getting the recognition they deserve.

As to being the soccer coach; well, that just happened. It was not because I knew a thing about soccer. Mostly, they needed a team medic but then it just kind of snowballed. It was, of course, an oddity for Belize to have a woman travelling with the guys, being in the dressing rooms, and stretching them out on the fields before games. I can tell you these players have, in fact, become like sons to me and I love them as such.

As to being the voice on the cell phone service, I was asked to read 10 lines for a demo, and then I was chosen. I read thousands of lines in both English (the main language of Belize) and Spanish. It is still so funny for my friends and I to hear my voice on the cell phone telling them, "The number you have reached is not available", or "You do not have sufficient credit for this call," etc.

When I am working on relocations with my clients, I always recommend and provide suggestions on how to become actively involved as a member of their new community. I feel it is by getting involved that you truly become a part of your new community.

From all of your experience in Belize, what would be the top 5 things that you have learned that you could share with us?

It is my pleasure to do so. The top 5 things I have learned are:
  1. Do your research, find a true professionals who have experiences like yours (Google their names to check);
  2. Ask questions, there is no such thing as too many;
  3. Get everything in writing;
  4. Accept that things may proceed slower in other countries and remember that this is why you looked to move in the first place;
  5. Enjoy your journey, ALL of it.
Macarena, we thank you very much for your time and we wish you and Chiara all the very best.


Offshore centers must demonstrate that they are adding value. But tax efficiency and discretion are still important.

Another in a continuing series of articles speculating just how far the crackdown on offshore financial centers by the high-tax countries will go, and how effective it will be. Five years from now we will be able to tell you; for now it is speculation. This analysis sensibly opines that offshore centers will have to prove, to customers and adversarial governments alike, that they exist because they add value and not just because of their "predatory" tax and secrecy regimes. The response on the part of OFCs will be at least one part promotion for every part substance, we suspect.

Offshore financial centers are braced for a mauling by Government regulators and tax authorities as the blame for failings in the financial system spreads far and wide.

They can argue that poor onshore bank governance was the cause, but they will not be able to avoid the backlash, as governments struggle to raise tax income in the recession.

German finance minister Peer Steinbrück has called for Switzerland to be placed on an international list of tax havens. He alleges local investment conditions have encouraged German taxpayers to commit fraud, following probes into accounts held in neighboring Liechenstein.

The OECD dubs Andorra, Monaco and Liechtenstein uncooperative tax havens. It is now preparing an updated list of villains and heroes.

French President Nicolas Sarkozy, representing the French EU presidency, says updating the global financial system will ramp up the pressure. He says: "Will we continue to work with tax havens? It is a valid question. We have passed into a new era."

In the U.S., Barack Obama has made the fight against tax havens a part of his presidential campaign, even though Delaware, home state of his running mate Joe Biden, is seen as the pre-eminent tax haven for large U.S. corporations.

In July, a U.S. Senate finance committee called for greater powers for tax authorities to combat offshore evasion. One official study estimates that offshore abuses cost the U.S. Government $100 billion a year in lost tax revenue. U.S. Senator Max Baucus says: "If we strengthen transparency for U.S. holdings in places like the Caymans, it will be a lot easier to tell who is not playing by the rules."

All this suggests offshore centers will need to demonstrate emphatically they can add value to the global economy.

Andrew Corlett, managing director of Isle of Man law firm Cains, says: "They must come within the circle. Regulatory systems must stand scrutiny and their tax systems must be comprehensible, not predatory. Information should be available through formal gateways such as tax treaties or tax information exchange agreements."

Kurt Tibbetts, leader of government business in the Cayman Isles, says the U.S. Senate report clarifies the role his center plays "in its role as a global financial services center, to the benefit of U.S. and non-U.S. persons". Tibbetts says the services provided by Cayman also comply with regulations not applicable to services governed by U.S. state laws.

Offshore centers can expect regulation of their financial structures. Opaque off-balance sheet vehicles will be prohibited. They need to act right now to reassure investors over the security of their assets. Although most jurisdictions offer some deposit protection, few, if any, can afford to protect them in the way governments have guaranteed onshore retail bank savings.

Any flight to quality will lead to relocation onshore, tax issues permitting, or the movement of funds to politically and economically strong jurisdictions such as Singapore.

Corlett adds: "Offshore savings for the mass affluent is going to become more problematic. The attractions of offshore centers are not as strong to them in a risk averse situation."

Centers that have relied on inviolate banking secrecy will find themselves particularly vulnerable. Philip Marcovici, a partner in law firm Baker & McKenzie, says: "The financial crisis is leading to a clamor for a global review of financial systems. But there are different dynamics at work here.

"Greater enforcement will be accelerated because onshore governments are in need of money. That has been the thrust of the attacks on certain offshore centers, such as Switzerland and Liechtenstein. The need to create jobs onshore will lead them to discourage investment offshore. ... Greater regulation and scrutiny play against the advantages of the lighter regulatory touch offered by offshore centers. Those that grapple with transparency and the exchange of information will be best placed to survive."

Centers go on to add value by providing politically stable, well regulated and tax neutral platforms for international investment, particularly for cross-border funds held in trust. They can act as a bridge between capital markets and financial services. Howard Bilton, chairman of Sovereign Trust in Hong Kong, says: "Hong Kong acts as a conduit in China because it has a very good treaty, in much the same way as Mauritius channels investment into India. Tax is not necessarily the main reason."

Offshore centers are secure administrative bases from which to facilitate investment. The extent to which offshore centers have become integral to world capital markets and investment flows is illustrated by the City of London's latest Global Financial Centers index, where offshore minnows rub shoulders with onshore whales.

According to the index, London and New York remain the only two truly "global" financial centers, but Singapore, Hong Kong, Zurich and Geneva occupy the next four slots. Other centers which punch way above their economic weight include Dublin (ranked 13), Jersey (14), Luxembourg (15), Guernsey (16), Isle of Man (19), Cayman Islands (21), Dubai (23), Gibraltar (25), British Virgin Islands (29) and Bahamas (35). To put this into perspective, Beijing is ranked 47, Mumbai at 49 and Moscow at 57.

"Offshore centers must demonstrate that they are oiling the wheels of international commerce, not simply siphoning off money," says Corlett.

But tax efficiency and discretion are still important. Monaco, not the OECD's favorite offshore center, has never been so successful in attracting individuals who view its legendary discretion as a virtue. HSBC Private Bank attracted record sums in the principality in the first half of this year.


Scrutiny is focused on potential crimes committed in the United States with American clients.

Swiss bank UBS recently turned over (or is still turning over) information on its American operations to the IRS. These "offshore" accounts were with a non-domestic bank but very much within the reach of the U.S. Now -- no surprise at all -- the U.S. government is moving on to other large overseas banks with U.S. domestic operations. HBSC and Credit Suisse are evidently next.

Note the typical New York Times propaganda that the investigation "has peeled back layers of Swiss banking secrecy, whose tradition dates to the Middle Ages." A very thin layer, perhaps. Again, these Swiss-run operations were very much on American soil.

The Justice Department has expanded its criminal investigation into foreign banks that sell offshore private banking services to include Credit Suisse and HSBC, according to people briefed on the matter.

The investigation into the two European banks is an outgrowth of an inquiry by federal prosecutors and regulators into UBS, the Swiss bank giant, over its sale of offshore banking services to wealthy Americans. Federal prosecutors, who are focusing on senior and midlevel executives and bankers at UBS, contend that UBS illegally helped American clients hide up to $20 billion in secret offshore accounts, thereby evading $300 million a year in taxes from 2000 to 2007.

HSBC, which is based in London and is Europe's largest bank, is a global financial giant with large retail, private, asset management and investment banking operations across the United States and Asia. Credit Suisse, which is based in Zurich, is also one of the world's largest private banks, with significant operations in the United States.

The investigation into HSBC and Credit Suisse began about September and is focusing on whether the two banks helped wealthy American clients hide up to $30 billion in offshore accounts that went undeclared to the IRS, the people briefed on the matter said. Prosecutors are examining whether the two banks illegally helped their American clients use those offshore accounts to evade United States taxes and whether the clients themselves violated U.S. laws.

The investigations are at an early stage and have not focused on any executives, these people said, though they added that could change as the investigations unfolded. Last month, federal prosecutors indicted Raoul Weil, a senior UBS executive who is one of the world's top private bankers, on charges of conspiring to help wealthy Americans evade taxes through UBS. The indictment of Mr. Weil, who oversaw UBS's lucrative cross-border private banking operations from 2002 to 2007, also referred to unindicted co-conspirators who "occupied positions of the highest level of management" within UBS.

The investigations into HSBC and Credit Suisse have emerged from information provided to prosecutors and are focused on the same kind of cross-border banking activities now under scrutiny at UBS, according to these people. The information has emerged, in part, from high-level discussions between senior executives at HSBC and Credit Suisse in the wake of the UBS inquiry. "UBS was not alone in this," said one of the people.

A spokeswoman for HSBC declined to comment ... on whether the bank had been swept up in a larger investigation stemming from the scrutiny of UBS. A New York-based spokesman for Credit Suisse referred calls to the bank's headquarters in Zurich, where a spokesman could not be reached for immediate comment. A Justice Department spokesman could not be reached late Monday for immediate comment.

The investigation into UBS, the world's largest private bank, has peeled back layers of Swiss banking secrecy, whose tradition dates to the Middle Ages. The custom, the backbone of a multibillion-dollar industry, is coming under increased scrutiny from American and European regulators, prosecutors and private-sector tax authorities over whether it facilitates tax evasion. The scrutiny is also focusing attention on the question of whether Switzerland is effectively an offshore tax haven.

The investigation of Europe-based banks signals a shift in focus by the Justice Department, which in recent years has focused on offshore banks operating in the Caribbean and Bahamas, two offshore tax havens.

The investigation into UBS began around 2007 and gained force last June, when a former senior private banker and American citizen, Bradley C. Birkenfeld, pleaded guilty to conspiring to help a wealthy American property developer, Igor Olenicoff, conceal $200 million through secret accounts set up by UBS and other entities in Switzerland and Liechtenstein.

Like the investigation into UBS, the scrutiny of HSBC and Credit Suisse is focused on potential crimes committed in the United States with American clients, even though the banks are based abroad.

Like UBS, HSBC and Credit Suisse are registered broker-dealers in the United States, but those licenses, which are overseen by the Securities and Exchange Commission, do not apply to banking or investment services provided by their overseas affiliates or overseas subsidiaries.


Falling assets values can throw a monkey wrench in one's best laid estate plans. One easy to comprehend example is where a block of assets is left to a surviving spouse and the rest of the estate is passed on to the next generation, or other beneficiaries. The original assumption that the spouse's assets would comfortably support him/her may no longer be valid.

Declining financial markets may catalyze an estate plan reappraisal, but, as discussed here, one may discover conceptual and execution-plan flaws that existed all along. This article from Forbes serves as a useful little tweak for thinking things through starting from your basic intentions.

With its emphasis on fundamental principles, the ideas discussed mostly apply whether one plans to have one's estate processed via the will/probate mill or -- as W.I.L./TrustProfessionals.com recommends -- one uses trusts and other legal entities to bypass that process. Of course minimizing the time and cost associated with distributing one's estate is a desirable goal, and should be incorporated in the planning.

A New Jersey widow in her 60s, spooked by the financial crisis, decided to put the $4.5 million she got from her husband's life insurance into federally insured certificates of deposit. She could have spread the money across 45 banks, taking advantage of the then insurance limit of $100,000 per depositor, per bank. (The limit has been temporarily raised to $250,000 through 2009.) For convenience, she could have bought CDs from dozens of banks from a single source, such as Fidelity or Schwab. But a bank employee persuaded her to buy 45 CDs from his bank, naming a different family member -- grandkids, nieces, nephews -- as beneficiary on each.

Big mistake. Yes, naming different beneficiaries made the whole $4.5 million insured. But if the widow expires before the CDs, the cash will go to those beneficiaries, not be split among her four children, as she wants. Her kids will not even have enough cash to pay estate taxes on the family business she is leaving them.

Even if you have not made any big moves recently, falling stock and real estate values could be playing havoc with your estate plan. This is a danger regardless of whether your estate is taxable, meaning families without fancy lawyers are, if anything, even more at risk. (The federal estate tax exemption is $2 million, rising to $3.5 million next year. Some states impose their own taxes at lower levels of wealth.)

So review your plan -- and just as importantly, how your assets are titled; what the beneficiary forms for your individual retirement accounts, 401(k)s and life insurance policies say; and any "payable on death" forms you have filed for CDs and other bank and investment accounts. Those forms, not your will, determine who gets those assets.

By paying attention (and, yes, maybe some lawyers' fees) now, "you can save a fortune of grief later," says Martin Shenkman, a Paramus, New Jersey estate lawyer who is trying to straighten out the mess created by the CD-loving widow.

Here is a simple example of how falling asset values matter. You are married and have made specific bequests directly to your children and grandchildren under the assumption that your spouse will still have plenty to live on. Is that still true? Suggestion: Amend your will to make all other bequests contingent upon a certain amount going first to your spouse. Have that amount adjusted for inflation.

What if you are widowed or divorced? If you are typical, you want your wealth divided evenly among your kids, but you may have done things through the years that inadvertently undercut that intent, particularly now that asset values are so volatile.

One easy-to-fix problem arises if you have set up joint bank or investment accounts with one of your children for convenience. The idea is that if you are traveling abroad, or incapacitated, the child can pay bills and make decisions. But if you die, the account bypasses your estate and belongs to the joint holder. Moreover, if the child goes broke while you are alive, a creditor could seize the joint account. Instead of a joint account, give the child a financial power of attorney.

Another trap, more likely in these credit crunch days: One of your kids cannot get a small business loan or a mortgage, so you lend him or her a wad. What happens if you die before that loan is repaid? Is the balance to be subtracted from his share of the estate or forgiven as a gift? Decide on this at the time of the loan, put the loan terms in writing and have a lawyer write a codicil to your will.

Other problems come up when you have named beneficiaries for accounts as an estate planning move. There are good reasons not to simply leave everything to your estate. For example, it's easier for heirs to stretch out the tax deferral on your IRAs if they inherit them directly.

Moreover, insurance policies and IRAs made payable to specific beneficiaries (as opposed to your estate) and bank or investment accounts made payable on death are not part of your court administered "probate" estate. In some states that makes a big difference in the time and fees it takes to transfer those assets to your heirs. For an estate with probate assets of $1 million, Florida presumes "reasonable" fees of 3% of assets for the lawyer and 3% for the executor, or 6% for the lawyer if he acts as executor, too. Outrageous. (Try to negotiate for less or for an hourly rate.)

For IRAs, the way to equalize shares is usually this: If you have two kids, instead of making each the beneficiary of a separate IRA that may hold different investments performing very differently, make each a 50% beneficiary on both IRAs. If you want the children of a deceased child to be entitled to that parent's share, indicate it on the beneficiary form. (Here, you may encounter a little Latin legalese: per stirpes. It means, roughly, that each branch of the family gets its share. It is a term you will see in, for example, the Vanguard beneficiary forms.) If your IRA is big enough, custodians will often allow you to use a custom-made beneficiary form, naming different beneficiaries, depending on who predeceases you.

Splitting up assets like CDs and brokerage accounts would seem to be simple, too: make each payable on death to each of your kids in equal shares. Except that a pay-on-death form usually cannot be customized to adapt to changing family circumstances, such as the death of a child.

Jeffrey Baskies, a Boca Raton, Florida estate lawyer, is handling a $1 million estate in which a widower's will left assets 50-50 to his son and daughter and provided that if one child died before he did, that child's 50% share would be split equally among eight grandchildren. The son died first, but because of Dad's use of payable on death accounts, the daughter wound up with 3/4 of the estate and the grandkids just 1/4. "Ill will has come up in what was a once-happy family," Baskies reports.

An alternative to payable on death accounts: a revocable living trust that keeps almost all your assets outside probate. This is more complicated than using beneficiary and POD forms and can cost as much as having your estate go though probate in a low-cost-probate locale. But not in Florida. In fact, retirees there are so probate-averse that "there are some condo communities where you are not allowed to go to the pool unless you have a revocable trust," Baskies quips.

Do you have a bigger, more complicated estate? There are a host of issues that can sabotage your plans in times like these. Many planners try to dissuade clients from leaving specific assets to specific heirs precisely because asset values change. Instead, they say, leave percentages of the total estate. But that may not be a good option if only your son wants to keep the family beach house or only your daughter wants to run the family business. More work for lawyers. Better to pay them now than have warring heirs pay two sets of lawyers later.


Last week we discussed our reacquaintanceship with the website Gizmo's Tech Support Alert and posted "Gizmo's Guide to Securing Your PC." This followup piece from the site's "All-time most popular" articles list is one on websurfing anonymously. While we have previously posted articles on this subject, this article conveniently and comprehensively summarizes the situation and available resources as they stand today.

OperaTor, a derivative of perputual upstart browser Opera, is the "clear first choice" of the article author for its speed and light resource use -- characteristics which endear Opera itself to us personally.

Note the article's concluding warning, however: For all the care you take, client-side technologies like Javascript and Flash on viewed pages can still compromise anonymity. Additional countermeasures need to be taken to defend against these.

There are many reasons people have for wanting to surf anonymously, ranging from simple paranoia in terms of protecting personal data, to hiding browsing activities from other users of a computer including parents, spouses, or even other organizations. Whatever your reasons for wanting to use anonymous browsing services, or criticizing others for wanting to use them, I will not debate the political, legal, moral, ethical and other reasons, but simply review the available technology. Be aware that most corporate networks will block the use of anonymous surfing activities at the corporate firewall. Corporate networks and internet links are after all the property of your employer and should never be misused in violation of corporate acceptable use policies, so do not expect any help here in finding ways to circumvent firewall blocking.

The most obvious anonymous browsing application for most people is in internet cafes, on public terminals, using wireless or even wired access points away from home, or in fact, on any PC including your own, where you do not want to leave traces of your private surfing activities. Some other browsing activity cleaners exist that clear the cache, cookies, history and other traces, some are even available as a standard in most browsers, but anonymous browsing goes a step further. What attracts me is not so much the privacy aspect, but rather the security potential, because all of the anonymizing browser proxy based services create a secure encrypted connection between the PC you are using and the first anonymizing proxy server. This allows you to safely transmit information without little risk of local interception, making it ideal for surfing on open Wi-Fi networks, or in hotels while travelling.

Previously, secure surfing on such networks required the use of private VPN networks, generally an option only available to corporate employees, those with the available money to pay for it and the technically savvy. Now, using any of the Tor or JAP based browsers, any surfer can reap the same sort of security benefits for their browsing. Whatever the reasons anyone may have for using anonymizing browsing, commercial services that offer anonymity are doing well, and a number of both free and subscription based browsing applications and services have become available.

Two dominant services exist which provide the foundation for free, secure anonymous browsing. The JAP network was good enough that the German Police insisted, in 2004, that a backdoor be put into the product to allow interception of child pornographers. This was done, but subsequently removed as a result of court action by the JAP development team. The alternative is Tor (The Onion Ring), which is a system that not only allows anonymous browsing but also anonymous P2P, email, IM, and IRC chat. Given the U.S. Navy origin of Tor, the suspicion inevitably arises that this system may have a permanent backdoor, however, the source code is now publicly available so that suspicion can perhaps be set aside. More worrying was a raid by German police in September 2006 involving the seizure of some Tor servers in that country. Again, pedophiles were the supposed target, but who really knows.

OperaTor is my clear first choice, a portable version of Opera with an included and well integrated Tor engine that uses the free Tor network. OperaTor is small and relatively fast, using just 6Mb of memory for its Tor engine, 2Mb for the Polipo caching proxy, 3Mb for the OperaTor loader and 18Mb for Opera. In my experience, OperaTor is by far the fastest browser, even with multiple proxies on the Tor network so that the browsing trail is frequently changing for greater security. Some people do not like the fact that OperaTor is not released with source code available (at least not that we have yet located) which may influence the choice in whether to use it or not. I believe that unless a user is proficient in programming, or at least reading the development language of any particular application, this becomes rather irrelevant, unless some amount of comfort or security might be perceived in knowing that source is available and others might be checking it even if the user of the application can not read it personally. Even closed source projects that become popular generally receive enough user and peer scrutiny that most problems would be quickly exposed.

JonDo (previously known as JAP) is my second choice and is in some ways a more flexible option, in that it is simply a Java application that performs the role of a local (PC based) proxy server that redirects browser requests via the JonDo (formerly JAP) network. This allows the user to configure their choice of any browser rather than requiring a change to Opera. Unfortunately, being Java based means that the application becomes somewhat bloated, requiring 54Mb of memory just for the Java JonDo application, as well as another few Mb for the JAP engine, and then whatever additional is required for the web browser of choice. JonDo does have quite a nice GUI display which shows the strength of the anonymity based on the number of anonymizing proxy servers, and takes care of managing the random proxy changes for greater anonymity. A commercial service known as JonDonym has been introduced which uses dedicated servers to provide higher speeds, higher levels of availability and more security along with support for chat, ftp and ssh in addition to web browsing. Another offering from the commercial JonDonym group is JonDoFox, a customized version of Firefox with JonDo code embedded along with other anonymizing optimizations. Unfortunately, not being a network like Tor JonDo is prone to some limitations in terms of the numbers of free servers, and some subsequent downtimes may be more likely with the smaller server base.

Vidalia is my third choice, a close match to JonDo in that it is quite a bit lighter in memory use and generally feels faster, but may not have the same level of anonymizing as JonDo. Vidalia is another integrated package using a combination of Privoxy and a Tor engine to connect to the Tor network, but it offers many new features. As with JonDo, Vidalia behaves as a local proxy for use by any browser, but it also provides configurations allowing it to run either as a simple standalone process or as a Windows service (for security and performance reasons, among others). Vidalia allows the user to participate in the anonymizing process by becoming a Tor Relay to help censored users in a similar way to becoming a BitTorrent relay, and a live realtime facility is available showing a map of the earth with lines representing connections to the Tor server participants. Vidalia uses 24—32Mb of memory, with an additional 4Mb used for Privoxy and another 16.5Mb for the Tor engine. One initially confusing aspect of Vidalia is that it provides a configuration access through port 9051, but it is not immediately obvious that Privoxy is listening on port 8118. Browsers using the Vidalia bundle must be configured to use the Privoxy port 8118 as the proxy server, not port 9051. Like JonDo, the Vidalia/Privoxy combination constantly changes proxy servers to mask the trail to provide greater anonymity.

Whatever your preference, both JAP and Tor networks offer a level of secrecy that is better than many commercial systems, though they are not watertight. Expect your surfing to slow down, in some case substantially, because you will be relayed through a chain of servers, all heavily impacted by BitTorrent users seeking to hide from the RIAA. Note: the latest V5 release of JAP now allows Tor users to use JAP as a software access point to the Tor network.

The XeroBank Browser (previously known as TorPark) provides a new customized version of the Firefox browser configured to work with the free Tor anonymizing service, or with a subscription service for higher speeds using dedicated servers, and other features. Firefox users may feel more comfortable with XeroBank, as it is based on Firefox, but also need not make any changes at all if they make use of either the JonDo or Vidalia bundles to access the Tor engine other than to set the proxy server, and of course, manual cleanup of the cache, cookies and browsing history after use. XeroBank claims to have many advanced features, but for the average user most of these may not be apparent, unless the subscription service is used. While the XeroBank browser is free to use on the Tor network, the XeroBank web site promotes the use of their subscription-based account. During installation, the XeroBank Browser offers the choice of using either the commercial XeroBank Client or the free Tor service. Caution! Some antivirus scanners report trojan infected code in the XeroBank download. Use http://jotti.org to verify all downloads, and use XeroBank and all other applications with caution, but be aware that some of the virus scanners used by jotti.org may also be overly zealous in their reporting of infections. Some claimed virus or trojan infections in various applications are no more than firewall detection, or software product key reporting capabilities mis-diagnosed by the scanner as a potential threat.

The downside of XeroBank as contrasted with using JonDo or Vidalia, is that you would need to use XeroBank for anonymous browsing and your regular browser for other surfing. Using JonDo or Vidalia, you can use the browser of your choice, and just reconfigure to use the proxy when you want to anonymous surfing. This will not automatically clean out all other personal data (cache, history, cookies etc.) when the application is shut down, which OperaTor and XeroBank do.

A final item for review recently brought to my attention by Peter, one of our visitors, is UltraSurf, which seems to be primarily targeted at people in China wanting to circumvent official government internet censorship. We will not get into the politics or ethics of either the censorship or circumvention of censorship, however the facility exists and may be useful to some people. UltraSurf is a very simple application, a single tiny 281Kb download containing just one executable, u.exe. When running, this little program uses just 7.5Mb of memory and performs the same role of proxy server as other applications, redirecting all browser requests via the UltraSurf proxy servers. While this is an interesting new development claiming to be very sophisticated, it seems on the surface to be rather simplistic, and does not appear to change proxy servers in the same way that JAP and Tor do. Browsing speeds also seemed to be somewhat slower than with either Tor or JAP browsing. The program appeared to be clean on a Jotti online malware scan, other than one possible trojan reported by F-Prot, so as with all software, while it appeared to be safe on my tests, test it out and scan it yourself. By default, UltraSurf changes proxy settings and launches Internet Explorer when it starts, but I was able to shut down Explorer and start FireFox and Opera with the proxy reconfigured to use the same port and successfully browse via UltraSurf.

For all anonymizing services, check that you are running in anonymous mode by first browsing to one of many servers which reports your IP address, for example WhatIsMyIP.com and take note of your IP address. Reconfigure your browser to make use of the anonymizing service, and reload/refresh the browser and verify that the reported IP address has changed. Some IP reporting servers will also tell you which country, and even which city you now appear to be connecting from.

Most of the services reviewed are able to run directly from a USB flash drive if the executables are simply copied as is from their installation directories. This works really well, just plug your flash drive into any PC with a USB port, launch both the anonymizing proxy software and a browser, set the browser to redirect via the anonymizer and you will be in business. In the case of both OperaTor and XeroBank, all you need to is launch the browser from your flash drive and you will be ready to start browsing.

While some "LiveCD" applications such as XeroBank Machine and Incognito Live CD have been created and may provide similar functions, they mostly seem to be currently released in various stages of alpha or beta test versions and have bugs or limitations. For example, the XeroBank Machine provides two options. You can either run the xBMachine.exe from a Windows prompt which starts a QEMU virtual machine and then runs a GenToo Linux kernel, or by booting from a "Live CD". This Live CD boots the same customized GenToo Linux environment from CD without any Windows involvement. In simple terms, both xBMachine options simply provide a different "hardened" OS platform to run the Firefox based XeroBank Browser.

Is LiveCD really useful? To some people, yes; not to me. It does mean that like SandBoxie, your guest operating system is protected from malicious web sites via your browsing, and when you stop the QEMU virtual machine or reboot the PC from hard disk rather than CD all traces are removed. I am a Unix/Linux geek so I am totally at home with them, but for the average person, I suspect the LiveCD and QEMU based options will provide a confusing level of complexity that will just interfere with their browsing and desire to be safe. Not much can beat truly safe browsing habits, whatever browser or add-on tools you use. xBMachine is a 380Mb zip file download, which unpacked yields a 391Mb ISO image to create a CD as well as another 10Mb or so of the QEMU environment. The QEMU hosted browser uses 292+Mb of memory, requires the ISO image present, and took more than 5 minutes to load and be ready for use on a 1.8Ghz dual core Intel PC with 1Gb or memory. It provides a Linux X-Windows GUI with a profile configuration, a network configuration, xBBrowser, e-mail, Pidgin instant messenger, terminal and an option to configure for the paid subscription network.

I do not know about you, but I am not willing to wait 5 or more minutes and have close to 300Mb of disk space tied up in a browser that took another minute or two to load, and then in my case never managed to connect out anyway. For those who feel that having source available makes a better product, go ahead and try to download the XeroBank source. All of the links gave me a 7Mb source zip file which was corrupted and would not open. Would this give you "open source available" feelings of security? I do not think so.

I am a freeware and open source fan, I can read and write programs, but not when the source file is corrupted, and I am not likely to start poring through tens of thousands of lines of code even if I could unpack the source. Even if it does unpack, how do we know that exact source was used to build the tool, and not another set of customized source with a built in Trojan or spyware? The reality is that we really do not know unless we both inspect the source code and then compile it and compare the distributed executable.

One final comment on anonymizing, your browsing activities will never be 100% secure and guaranteed to be anonymous. It will be very difficult for anyone to trace you while browsing through the Tor network, except as reported in the Tor wiki, "when you access pages that use Java, Javascript, Macromedia Flash and Shockwave, QuickTime, RealAudio, ActiveX controls, and VBScript are all known to be able to access local information about your operating system and local network. These technologies will work over proxies and can tunnel the information back to their source."

So to end around getting compromised by thes ubiquitous technologies you will need to use a webpage and HTTP header prefilter, such as the no longer being developed but still very functional Proxomitron. We will cover this subject in the future.

Best Free Firewall

Another Gizmo Tech Support Alert "All-time most popular" article is this one on the best free firewall. Firewalls are an extremely important element of your computer security armament, whether or not the anonymous surfing covered above is a priority.

Notably, ZoneAlarm, the free firewall which has had the highest brand name recognition, is flat not recommended at this point. Fortunately, there are several viable alternatives available.

No other single product class seems to cause as much angst to average users, in their installation and day-to-day use, as Firewalls.

For such users, Sunbelt-Kerio Personal Firewall is our top recommendation, as it seems to cause the fewest problems yet also manages reasonable protection.

Kerio dropped the product in late 2005 but, thankfully, Sunbelt Software, the makers of the excellent CounterSpy anti-spyware scanner, picked it up and continue to make it available. The free and paid versions of Sunbelt Kerio are the same. If you don not buy the product, some advanced features are automatically turned off after 30 days. The product will also nag you every time you start it. For some, this is a small price to pay for a great free firewall. For others, it is a real turnoff.

If performance rather than ease of use is your criterion, then the Comodo firewall is the top contender. The firewall itself is very robust, and the just-released version 3 includes a well-designed intrusion detection system and Vista compatibility. Comodo also supports internet connection sharing, whereas the free versions of Kerio and ZoneAlarm do not. On the minus side, the IDS is initially rather talkative, and this may unnecessarily alarm inexperienced users. There have also been reports that the new version 3 has some bugs, so it may be better to wait a couple of months until it has stabilized. Additionally, Comodo has been known to conflict with some other security products. However, for the technically initiated who can cope with these annoyances, this is an outstanding free product and an easy first choice. Make sure that you install it in "Advanced" mode, because the "Basic" installation has the HIPS, which includes the leak test protection, disabled.

A recent contender is the free version of Online Armor Personal Firewall V3, which has been getting praise for its outstanding leak-test performance and ease of use. We were impressed with the full commercial version, but as we have yet to test the cut down free version, we are reluctant to make a recommendation. The feedback we have been getting from users has been very positive.

Also technically impressive is the Jetico Firewall. It rates highest on the leak tests of all firewalls, but I find it awkward to use. It may, however, suit you.

Another tricky product is NetVeda Safety.Net firewall. Its performance is quite outstanding and it also offers application control and content filtering. This highly capable product deserves to be better known, and experienced users should definitely put it on their short list.

We no longer recommend the free version of the ZoneAlarm firewall. First, it is a very basic product compared to the commercial ZoneAlarm Pro version. The leak-test performance of the latest free version is extremely poor, whereas the Pro version is excellent. The download also includes the large commercial ZoneAlarm suite, so be careful not to install it. ZoneAlarm free does have the advantage of working with Vista.


Rampant phony hotspots created by phishers, and plenty of open or insecure networks run by critical operations such as baggage handling and ticketing.

Everyone should understand that unencrypted wireless networks can be easily viewed from the outside. Using a public Wi-Fi hotspot without encryption is extending an open invitation to be spied on and hacked, and all the risks that entails.

OK, so you do not do anything overtly thoughtless about guarding your security when using wireless networks. However, did you know that the Wired Equivalent Privacy encryption standard (WEP) used for most public and home networks is easily broken? And that its replacement, the Wi-Fi Protected Access encryption standard (WPA), may be on the verge of being cracked?

To us the bottom line is that one should assume wireless networks are inherently insecure. Information that you do not wish to see in others' hands should not be transmitted over them.

Richard Farina booted up his computer on an American Airlines flight in October from New York to San Francisco. It was one of the first commercial flights to offer wireless Internet service. Within a couple minutes of reaching 10,000 feet, Farina was snooping the airwaves with the ability to see what his fellow passengers were doing without having to leave his cramped middle seat.

Farina is not a bad guy. He was just doing his job as a so-called white-hat hacker for AirTight Networks, a manufacturer of wireless intrusion protection hardware and software. AirTight's chief executive, David King, sends hackers out for unsolicited security assessments. Earlier this year he dispatched Farina and a few other of his 100-plus employees to collect wireless security data at 20 U.S. airports and a few abroad. They found rampant phony Wi-Fi hot spots created by phishers and, at several large airports, plenty of open or insecure networks run by critical operations such as baggage handling and ticketing. Almost all public networks allowed data such as user names and passwords to pass through the air unencrypted. Only 3% of people used something more secure.

To be sure, King's missions are self-serving; he runs a business that sells the devices that plug security holes. But King says that U.S. airports have a genuine problem. Very few, such as McCarran International in Las Vegas, monitor all wireless traffic for intruders. (The Vegas airport officials are quick to add that they do not censor for content.) Others, like San Francisco International, are laissez-faire. AirTight found that 47 wireless networks used for SFO's airport operations were wide open or poorly secured.

Wireless networks are some of the most easily hacked. Indian terrorists this summer broke into underprotected networks to e-mail a warning prior to bomb blasts in Delhi and Ahmedabad. In August the Justice Department indicted 11 members of a retail hacking ring, accusing them of grabbing millions of credit and debit card numbers off networks inside stores run by TJX Companies, BJ's Wholesale Club, OfficeMax, Barnes & Noble and Forever 21, among others.

The most common means of protecting Wi-Fi networks, the Wired Equivalent Privacy encryption standard, or WEP, was broken in 2001. Nowadays a moderately skilled hacker needs only a couple of minutes to crack its key with an off-the-shelf wireless card. In November a pair of German computer science students made a critical first step toward cracking the Wi-Fi Protected Access encryption standard, or WPA, once heralded as the solution to WEP's insecurity.

The market for wireless intrusion prevention systems is still small: $168 million worldwide this year, according to research firm Gartner, but that represents a 40% gain from 2007. King's AirTight competes with other sellers of Wi-Fi security gear such as AirMagnet and AirDefense, which was recently acquired by Motorola for an undisclosed sum. Publicly traded Aruba Networks and Cisco Systems sell wireless security systems that are already built into their networking gear. Four-year-old AirTight has 600 customers paying between $40,000 and $50,000 a year. The private company in Mountain View, California also licenses its products to hardware makers Siemens and 3Com.

King says that most of his clients are retailers, which are compelled by credit card industry audits to protect the financial data that travel on their networks, but airports are high on his prospect list. He and other security vendors say airports have been slow to harden their airwaves because of cost. It might require $200,000 to cover a place as big as San Francisco International, and the airports lack any mandate from the federal government to take control of the networks run by airlines and the companies that service them.

AirTight's system consists of a $5,000 to $10,000 central server that can manage a few hundred sensors at a time. The sensors, which look like a home Wi-Fi access point, cost $500 to $1,200 apiece. AirTight's server sends out what the company calls marker packets that identify radios actively connected to the network. Those packets are bounced back to the sensors from any active connection. All unauthorized connections are cut off. The server continues to monitor the airwaves for unauthorized attempts to connect.

McCarran airport is one of those willing to spend money for wireless security. It runs two wireless networks, one for public use and another for airport operations. "It was our intent to put the passenger in a bubble. He can go out to the Internet, but he cannot touch anything on the airport side, and he cannot see anyone else who is using the network," says Gerard Hughes, IT service manager at McCarran, which pays Aruba Networks $20,000 a year for software and hardware maintenance.

AirTight's David King will continue to cause headaches for airports with his surreptitious security scans to raise awareness and woo them as customers. "For any security product, there is this learning curve," he says. "We are somewhere in the getting-past-the-awareness stage."


We are at last in a position where the Wall Street monster has ceased to suck resources from the remainder of the economy.

The old military-industrial complex became the military-industrial-financial complex during the credit bubble. Whatever the name, the bottom line is that the financial sector, with a gigantic assist from the federal government, became the proverbial tail wagging the dog .. at the expense of everyone else. The financial services industry ideally facilitates the production of real wealth. Instead it sucked wealth out of the real economy. All the talent drawn to Wall Street was the equivalent of billionaires playing poker in Vegas. Entertaining ... until it brought down the house and the surrounding community.

PrudentBear.com regular Martin Hutchinson has been a frequent and vocal critic of the institution Wall Street and its "diseased structure." Now it has been cut down to its justified size, and in a hurry at that. Here Hutchinson lays out a brief history of Wall Street "innovations" that paved the road to hell. Helpful for understanding how we got here.

The financial services industry as we have known it since the early 1990s has effectively collapsed. Its flaws of over-optimistic risk management, aggressive rent extraction and excessive leverage have proved fatal, as was eventually inevitable. Since a modern economy cannot function without an adequate financial services sector it is not sufficient to push the remaining invalids off into bankruptcy. Instead we must make some decisions as to how we want to replace them. As the great multiple bubble of 1995-2008 appears finally to have deflated, it may now be time to peer into the mist ahead.

In determining the shape of the new financial services industry, we need first to anatomize the flaws that must be corrected. This week, I shall concentrate on diagnosis, anatomizing the multiplicity of diseases that Wall Street has contracted. Next week, I will focus on cure, or at least alleviation of the resulting economic ills.

The central flaw in the Wall Street of 1995-2008 (the previous decade, from about 1985, had been a period of transition from a functioning model to a flawed one) was the move towards proprietary trading and the rent seeking with which that was associated. There is an inherent conflict of interest in major financial advisors or arrangers of deals being themselves large participants in the market. Buying a few shares in a successful new issue is a traditional practice, and probably does little harm (it tilts the playing field, but traditionally only modestly). However ramping up the firm's capital until it is as large as the country's major banks, and then leveraging that capital 30 to 1 to invest in illiquid speculations, is not just a recipe for disaster. It also inserts the advisor, quintessentially an intermediary, into the market as principal, distorting its advice and providing a gigantic source of "insider trading" since the advisor has inside information, not necessarily on the issuer, but certainly on the market.

Goldman Sachs's 2006 investment in the Industrial and Commercial Bank of China -- a transaction that has not blown up and attracted little criticism either then or subsequently -- is a classic example of issuing houses' conflicts of interest. Goldman Sachs acquired a $2.6 billion equity position in ICBC in May 2006, at a price of 1.2 times book value, at a time when it was obvious that ICBC would shortly go public and very likely (absent a 2008-style financial crisis two years early) that it would succeed in doing so at a price far in excess of that Goldman had paid. In the event through the flotation Goldman achieved an almost risk free profit of $4.8 billion, a 185% return in only six months. It did so through ignoring a huge conflict of interest between its duties as advisor to ICBC and arranger of its financing and its huge speculative shareholding in the bank.

The only risk remaining was that Goldman had to hold its ICBC stock for three years (presumably until May 2009.) This looked a slam-dunk, but now looks less so. ICBC's stock is currently down to HKD3.35 against its issue price of HKD3.15 and could fall further. Still, 185% is 185%, even over three years. As an additional wrinkle in this deal, 2/3 of the investment was taken not by Goldman itself but by funds controlled by Goldman partners, thus providing a further conflict of interest between the partners and the corporation.

Goldman could have hedged its exposure to ICBC by shorting the overall Chinese market as well. We would be surprised if it has not.

The private partnership is by far the most appropriate vehicle for what is essentially a team-based and reputation-based advisory business. Experience has now shown that control of a public company, particularly a public company with resources that are a multiple of their own wealth, provides temptations to Wall Street bankers that those fallible souls are unable to resist. In London, the disappearance of traditional merchant banks, whose capital had been provided primarily by their top management, and their replacement by Wall Street or by other investment banking operations controlled by financial behemoths produced the same effect: the capital involved in the business became "dumb money" which could be manipulated to enrich those who controlled its disposition.

The extreme examples of "dumb money" in 1995-2008 were the hedge funds and private equity funds that proliferated, especially since 2000. It is notable that private equity funds have since 2000 been very limited investors in venture capital, the sector of long term investment in small growth companies, genuinely beneficial to the U.S. economy, which became the fad of the late 1990s and cratered spectacularly thereafter. There is a limited role for both hedge funds (speculative pools of money designed to achieve short term profits without regard to the market) and private equity funds (holders of control stakes in companies undergoing financially painful restructuring), but both sectors deserve only a very modest share of the investment capital pool and their managers perform no especially valuable service and thus deserve only moderate remuneration. Institutions that invested in such funds in 2002-06 paid greatly inflated rewards to fund managers without significantly diversifying their portfolio from the U.S. stock and bond markets. Any such institutions that invested heavily as fiduciaries deserve to be sued by their beneficiaries and doubtless some will be. Meanwhile the downturn has delivered heavy blows to both the hedge fund and private equity sectors, blows that were mostly richly deserved.

One result of the bloating of investment bank balance sheets and the separation of capital from staff was the increasing reliance on phony risk management schemes. The Value at Risk methodology was highly convenient to staff seeking immediate bonuses, while completely ignoring the "tail" risk of a financial downturn such as the current one, thus enabling highly correlated risks to be built up to an extent wholly inconsistent with preservation of the enterprise as a long-term functioning entity. This spurious risk management technique achieved such acceptance that the bureaucrats writing the Basel II system of bank capital controls built it into their regulations, allowing banks using VAR essentially to allocate their own capital.

This particular moral hazard is the principal downside of government bailouts. If Wall Street thinks the government will always help out in extremis, they will inevitably design ziggurat-like risk management structures that pay off nicely for several years, making everybody involved rich, and then collapse in ruins on the heads of taxpayers.

The problems of rent-seeking and phony risk management were exacerbated by Wall Street's compensation structures which were highly politicized, opaque and focused entirely on the short term. Bankers learned that building the long-term standing of the institution was of little value, and that businesses that took more than a year to develop were only to likely to benefit one's successor rather than oneself. Conversely short-term profit maximization schemes that had immense long-term risks or even costs were of great value in producing the current year's bonus. Without the warped compensation schemes, the phony risk management would not have happened.

Another Wall Street problem was that everybody became overpaid. In order to justify the inordinate rewards that Wall Street's rent-seeking produced at the top or for the luckiest traders, everybody's compensation was swollen far beyond what would have been needed to attract executives of the necessary considerable but narrow talent. Attempts were made to justify this by working everybody 90 hours a week, but nobody ever asked the question: What if Wall Streeters worked 45 hours a week for half the reward? ... Their compensation would still have been generous, and the productivity and societal connectedness of Wall Street talent would have been much greater.

One of the principal rent-seeking methods employed by Wall Street was the derivatives business. This has been sold to outside users and the public as a means for corporations, banks and others to hedge their risks of currency, interest rate or credit, thereby reducing their overall risk profile to that of the operating business in which they were engaged. However, it quickly became much more than this largely because of humanity's eternal quest to get something for nothing and Wall Street's financial engineers' endless ingenuity in obscuring costs. For example retail investors were offered "risk free" products in which they appeared to get much of the upside of equity investment, while having return of principal guaranteed. In reality, through the magic of derivatives, such products' principal function over the long run was to divert investor wealth into broker pockets through gigantic hidden fees and costs.

While derivatives focused largely on interest rates and freely traded currencies, and on liquid equities in a market whose fluctuations were limited, they produced nothing but profits for Wall Street. The invention of credit derivatives however may have brought the happy game to an end. Unlike interest rate or currency products, credit derivatives are very one-sided in their payoff. If there is a default, some large fraction of 100% of its nominal principal must be paid out, while the annual insurance premium is only a small fraction of that. Thus if one of the endless chain of intermediaries goes bust in a credit downturn, it is likely that sums totaling a substantial multiple of the original credit being insured must be paid out. The outstanding amount of credit derivatives reached $62 trillion earlier this year, at a time when the total volume of insurable credit was less than $20 trillion at the most generous estimate.

The effect of Wall Street participation in the credit derivatives market can be shown by the case of AIG, an insurance company with a Wall Street derivatives operation attached, in which the Federal government has had to pump in more than $150 billion, without any coherent explanation of where the money is going or what it might be achieving. At first sight it appears that the inevitable credit derivatives disaster may have been entirely concentrated in one house -- or is it simply that AIG is the first to have been identified, and that other equally large holes have been blown in the fabric of other large derivatives dealers? Doubtless, we shall shortly find out.

The final Wall Street folly was the practice of banks originating loans and off-selling them, without keeping any "skin in the game." I have to say that as a participant I thought securitization to be a largely useful invention, although it was always clear that its legal and other structuring costs could easily exceed any economic benefits. However, the existence of Fannie Mae and Freddie Mac, two entirely irresponsible institutions with the implicit backing of the federal government, encouraged the development of a securitized home mortgage market in which the originators neither knew nor cared what happened to the loan after they originated it. Wall Street needed the help of the nation's encyclopedia salesmen and used car dealers, acting as "mortgage brokers" to perpetrate the disaster in subprime and other securitized mortgages; they did not do it alone. Nevertheless Wall Streeters were the brains behind the scam and they profited very well from it -- at the cost of significantly increasing the cost of home mortgages beyond what it had been in the old days of local lending institutions.

The above list of diseases is probably not exhaustive, but it is above all long. It is in retrospect extraordinary that such a diseased structure did not collapse much earlier. Maybe, without being fed the stimulative drug of excessive money supply, it would have done so. In any case, contrary to the gnashing and wailing from the media and the political class about the recent unpleasant events (if you were on the bull side) the reality is that we are now at last in a position where the Wall Street monster has ceased to suck resources from the remainder of the economy. Going forward we can hope that the financial services business will continue operating on a respectably downsized and down-wealthed basis, adding value where desirable without sucking resources from other worthy endeavors. Next week, I will suggest what such a new structure for Wall Street might look like, and how we might get there from here.


How the president-elect tapped into a powerful – and only recently studied – human emotion called “elevation.”

For those wondering about the joy juice that so many of Barack Obama's supporters seemed to be drinking, a plausible explanation is that they were experiencing "elevation" triggered by Obama's gifted oratory. The term was coined by UC-Berkeley pyschology professor Dacher Keltner. The elevation phenomenon has always existed, and will be directly familiar to most people to some degree, but it has finally been recognized as a distinct emotional state and a subject for psychological study. We are quite relieved -- ecstatic even -- to get this affirmation from the academics. Our relief in unbounded knowing that our episodic ecstatic, "self-transcending" emotional states are real and not just figments of our imaginations.

Haidt's research reveals some provocative morsels, such as that elevation is good at provoking a desire to make a difference but not so good at motivating real action. Notwithstanding that: "It does appear to change people cognitively; it opens hearts and minds to new possibilities."

Kept in its proper place, elevation -- as with good emotions in general -- is life-affirming and, at the very least, a worthwhile experience. But history, in the form of Hitler, Jim Jones, Charles Manson, the Jacobins, and similar political and cult leaders and movements, warns us that the creation of such feelings in collectives can lead to horrific results. Obama is apparently wary of overusing his gifts, and he cannily toned down his rhetoric as the campaign wore on. Hopefully his obviously accute intelligence includes a measured appreciation of the historical uses and abuses deriving from "elevating" the mob.

For researchers of emotions, creating them in the lab can be a problem. Dacher Keltner, a professor of psychology at the University of California-Berkeley, studies the emotions of uplift, and he has tried everything from showing subjects vistas of the Grand Canyon to reading them poetry -- with little success. But just this week one of his postdocs came in with a great idea: Hook up the subjects, play Barack Obama's victory speech, and record as their autonomic nervous systems go into a swoon.

In his forthcoming book, Born To Be Good (which is not a biography of Obama), Keltner writes that he believes when we experience transcendence, it stimulates our vagus nerve, causing "a feeling of spreading, liquid warmth in the chest and a lump in the throat." For the 66 million Americans who voted for Obama, that experience was shared on Election Day, producing a collective case of an emotion that has only recently gotten research attention. It is called "elevation."

Elevation has always existed but has just moved out of the realm of philosophy and religion and been recognized as a distinct emotional state and a subject for psychological study. Psychology has long focused on what goes wrong, but in the past decade there has been an explosion of interest in "positive psychology" -- what makes us feel good and why. University of Virginia moral psychologist Jonathan Haidt, who coined the term elevation, writes, "Powerful moments of elevation sometimes seem to push a mental 'reset button,' wiping out feelings of cynicism and replacing them with feelings of hope, love, and optimism, and a sense of moral inspiration."

Haidt quotes first-century Greek philosopher Longinus on great oratory: "The effect of elevated language upon an audience is not persuasion but transport." Such feeling was once a part of our public discourse. After hearing Abraham Lincoln's second inaugural address, former slave Frederick Douglass said it was a "sacred effort." But uplifting rhetoric came to sound anachronistic, except as practiced by the occasional master like Martin Luther King Jr. or Ronald Reagan. And now Obama.

We come to elevation, Haidt writes, through observing others -- their strength of character, virtue, or "moral beauty." Elevation evokes in us "a desire to become a better person, or to lead a better life." The 58 million McCain voters might say that the virtue and moral beauty displayed by Obama at his rallies was an airy promise of future virtue and moral beauty. And that the soaring feeling his voters had of having made the world a better place consisted of the act of placing their index fingers on a touch screen next to the words Barack Obama. They might be on to something. Haidt's research shows that elevation is good at provoking a desire to make a difference but not so good at motivating real action. But he says the elevation effect is powerful nonetheless. "It does appear to change people cognitively; it opens hearts and minds to new possibilities. This will be crucial for Obama."

Keltner believes certain people are "vagal superstars" -- in the lab he has measured people who have high vagus nerve activity. "They respond to stress with calmness and resilience, they build networks, break up conflicts, they are more cooperative, they handle bereavement better." He says being around these people makes other people feel good. "I would guarantee Barack Obama is off the charts. Just bring him to my lab."

It was while looking through the letters of Thomas Jefferson that Haidt first found a description of elevation. Jefferson wrote of the physical sensation that comes from witnessing goodness in others: It is to "dilate [the] breast and elevate [the] sentiments ... and privately covenant to copy the fair example." Haidt took this description as a mandate. Since it is tricky to study the vagus nerve, he and a psychology student conceived of a way to look at it indirectly. The vagus nerve works with oxytocin, the hormone of connection. Since oxytocin is released during breast-feeding, he and the student brought in 42 lactating women and had them watch either an inspiring clip from The Oprah Winfrey Show about a gang member saved from a life of violence by a teacher or an amusing bit from a Jerry Seinfeld routine.

About half the Oprah-watching mothers either leaked milk into nursing pads or nursed their babies following the viewing. None of the Seinfeld watchers felt enough breast dilation to wet a pad, and fewer than 15% of them nursed. You could say elevation is Oprah's opiate of the masses, so it is fitting that she early on gave Obama her imprimatur. And that for his victory speech was up front in Grant Park, elevation's moist embodiment, feeling so at one with humankind that she used a stranger as a handkerchief.

The researchers say elevation is part of a family of self-transcending emotions. Some others are awe, that sense of the vastness of the universe and smallness of self that is often invoked by nature. Another is admiration, that goose-bump-making thrill that comes from seeing exceptional skill in action. Keltner says we most powerfully experience these in groups -- no wonder people spontaneously ran into the street on election night, hugging strangers. "We had to evolve these emotions to devote ourselves into social collectives," he says.

When you start thinking about mass movements, all those upturned, glowing faces of true believers -- be they the followers of Jim Jones or Adolf Hitler -- you do not always get a warm feeling about mankind. Instead, knowing where some of these "social collectives" end up, the sensation is a cold chill. Haidt acknowledges that in "calling the group to greatness," elevation can be used for murderous ends. He says: "Anything that takes us out of ourselves and makes us feel we are listening to something larger is part of morality. It is about pressing the buttons that turn off “I” and turn on “we.”"

Even at its most benign, elevation can seem ridiculous to outsiders. Think of how Obama's opponents love to mock his effect on people. During the campaign, if your chest was contracting while all about you chests were dilating, you may be a Republican. If you were unmoved by Obama, watching your fellow citizen get all tingly, even fall into a faint (too much vagus stimulation, and you are going down), was maddening. "Other people's reverence seems unctuous and sanctimonious," says Keltner.

Obama himself seemed aware of the dangers that too much elevation might pop his candidacy like a helium balloon hitting a power line. Conservative columnist Charles Krauthammer described Obama's canny strategy to make his rhetoric more pedestrian for the final months of the campaign.

While there is very little lab work on the elevating emotions, there is quite a bit on its counterpart, disgust. University of Pennsylvania psychologist Paul Rozin has been a leading theorist in the uses of disgust. He says it started as a survival strategy: Early humans needed to figure out when food was spoiled by contact with bacteria or parasites. From there disgust expanded to the social realm -- people became repelled by the idea of contact with the defiled or by behaviors that seemed to belong to lower people. "Disgust is probably the most powerful emotion that separates your group from other groups," says Keltner.

Haidt says disgust is the bottom floor of a vertical continuum of emotion. Hit the up button, and you arrive at elevation. This could be why so many Obama supporters complained of being sickened and nauseated by the Republican campaign. Seeing a McCain ad or Palin video clip actually felt like being plunged from their Obama-lofted heights.

Disgust carries with it the notion of contamination, which helps to explain the Republicans' obsession with Bill Ayers, Tony Rezko, and Jeremiah Wright and their frustration that more voters did not have a visceral reaction that Obama had unforgivably sullied himself by association with these men. But this time, elevation won. And expect that on Inauguration Day, even if the weather is frigid, millions will be warmed by that liquid feeling in their chests.


Man loses £230,000 in Icelandic bank crash.

The unfortunate man featured in this story truly appears to be collateral damage in the worldwide banking crisis. He has had a 44 year overseas career. Having an offshore bank account was a great convenience. Then his original offshore bank was taken over by an Icelandic bank, and you can guess the rest.

We are not fans of bank deposit insurance, believing the institution ultimately encourages too-easy lending practices. And, when there is no such insurance one does need to engage in more diligence that otherwise before choosing a bank for one's deposits. One further must ongoingly monitor that bank's operations, especially if a business transaction such as a merger occurs.

A man believes he has lost his life savings of £230,000, which he fears have been wiped out by the Icelandic bank crash. Brian Lewis (67), of Eider Close, Barton-Upon-Humber, had his money in an offshore account with Kaupthing Stringer & Friedlander bank (KSF) on the Isle of Man.

"My wife and I opened an account with Derbyshire Building Society's offshore bank over 16 years ago," he said. "As I have worked away for 44 years the offshore bank made it easy for me to transfer my monthly salary payments from different parts of the world. Derbyshire was taken over by the Icelandic Bank Kaupthing Stringer & Freidlander."

Mr Lewis, who is an engineer, has been working in the Indonesia province of West Papua for three months and returned home last Tuesday, when he had planned to retire. He said he had been looking forward to spending his savings with his wife Shelia (64).

"This was supposed to be my last working trip, but with all our savings gone, we only have two months' salary to live on," said Mr Lewis. "I had planned to pay for my daughter's wedding next year, which at the moment just is not possible."

Mr Lewis learnt that because his savings were held on the Isle of Man, they were not covered by the rescue package offered by the British government. He may eventually get some money back through a scheme on the Isle of Man.

Gibraltar Offers Spain “Complete Transparency” and “Maximum Cooperation”

Anxious to shed its reputation as a naughty tax haven, and undoubtedly anxious as well to keep big neighbor and territorial claimant Spain placated as much as is possible while still retaining some sovereignty, Gibraltar has promised that in will open its financial books to Spain on demand. This means opening them to the EU in general. What competitive advantages as a financial center remain for Gibraltar is not clear to us.

The Chief Minister Peter Caruana is to offer Spain an agreement to guarantee the "complete transparency" and the "maximum cooperation" on the financial center, as well as the interchange of information on financial matters. It follows a meeting at #6 Convent Place on Saturday with Spanish parliamentary reporters.

As a result of this meeting, it is reported that Mr. Caruana has said that he is to propose in the tripartite forum an agreement with Spain to guarantee the transparency of financial operations in Gibraltar.

As already known, the tax-exempt companies will disappear on 1 July 2010 when a 10% tax is to be introduced. ... [Caruana] will be proposing in the forum an agreement with Spain to guarantee "complete transparency" and "maximum cooperation" to show that Gibraltar is a financial center but not a "fiscal paradise," that is, a tax haven.

While Mr. Caruana takes the view that Gibraltar complies with all established legal requirements, he wants to offer guarantees to the Spanish government that such is the case. The deal would entail an what is being described as an interchange of information about movements in the financial center to avoid a feeling of opacity.

New Rules Limit Costa Rican Offshore Bank Operations

Costa Rica has eliminated a loophole that has allowed offshore-run banks to escape the government's supervision and control, and, perhaps more importantly, to avoid a not insubstantial tax. Given the later one wonders why it took so long.

The Superintendent General of Finances (SUGEF) intends to pass a bill on December 18th highly limiting the operation of offshore banks in Costa Rica. Such banks are considered to be foreign owned banks existing in Costa Rica that license their banking to a Costa Rican organization. Until now, these banks enjoyed a large amount of freedom in setting their own interest rates and were not obligated to pay a large tax to the Banco Central de Costa Rica, as national banks are.

The economic authorities voted to restrict the operational activities of offshore banks as they cannot supervise or oversee their monetary control. Currently Costa Rica has six offshore banks operating in Costa Rica of which Scotia Bank and BAC are two of the biggest.

Based on the imminent threat that these new regulations will become a reality, some of the offshore banks have already decided to take action as they have large projects in the works that can be highly affected by these rules.

The financial group BNS, which owns ScotiaBank, announced on November 25 the the immediate selling of its offshore bank, Transamerica Bank and Trust, based in Panama. Gerardo Corrales, General Manager for BAC San Jose stated they would be moving in a similar fashion to that of ScotiaBank in the coming weeks. ...

Under the current system an offshore bank, say in Panama, gives a license and permission to another organization in another country, say Costa Rica to operate, however that company does not realize its operations there and therefore SUGEF cannot control its monetary movements. The current change will make it impossible for this to happen and an offshore bank will essentially have to set up shop in the country it is operating in and cannot give licenses away. This way effectively the bank will not be offshore and the Costa Rican Financial Controllers can better control the monetary movements.

The Banco Central of Costa Rica will also be able to mold the banks as well and make them pay the 15% withholding tax in Costa Rica. This 15% tax of course will generate a huge amount of revenue for Costa Rica and some question whether this could be the cause of the rule rather than leveling the playing field for all banks in Costa Rica?

Learning for Liberty

LewRockwell.com columnist Thomas Woods is author of such books as We Who Dared to Say No to War: American Antiwar Writing from 1812 to Now, Who Killed the Constitution? The Fate of American Liberty from World War I to George W. Bush, and bestseller The Politically Incorrect Guide to American History. Here is his liberty works reading list, for those eager to cut through the propaganda and uncover the truth.

So much to read and learn, and so little time. Thanks in no small measure to the energy that Ron Paul's candidacy unleashed, more people than ever are eager to cut through the propaganda and uncover the truth. But where to start? And how can you get the most out of the time you have to devote to reading and study?

I put together the resources that follow as my way of answering these questions. I have included books (many in free online versions) and articles, as well as audio and video files that are also free. For the current crisis, see especially The Bailout Reader. Take a look also at the reading list Dr. Paul includes in his book The Revolution: A Manifesto. Many of these titles also appear in the categories below: economics, sound money, foreign policy, the Constitution, and civil liberties.

Can we read our way to freedom? No, but we cannot be effective activists in the Ron Paul tradition unless we know some economics and history, and the various depredations, foreign and domestic, of the regime.